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Thursday, 3 December 2015

'The Appraisal Process' - An ADR Solution for CAT Events

(Glenn Gibson, Hamilton, ON)

2013 resulted in payments of over $3.2 billion in property claims.  For the 25-years leading up to 2008, the industry averaged payments from natural catastrophe losses around $400 million.  Like it or not we must all face the reality that we are going to face an increased frequency of catastrophic events and we must prepare for the impact.

The insurance claims industry does a terrific job handling the volume of claims that appear with no warning.  And they successfully conclude those claims with a high degree of customer satisfaction.  But the reality is that fulfilling the “insurance promise” can end up down a bumpy road where there are significant disagreements on the “amount of loss”.  Where these situations occur one might think the solution will involve costly, time-consumming litigation.  The reality is that we have a built in, mandatory Appraisal or Dispute Resolution process that is part of the Statutory Conditions of all property insurance policies in Canada. 

In spite of this ADR process being part of our insurance contract for decades the process is not widely known and understood.

When someone elects to purchase an insurance policy they create a contract between both parties. 
Each common law Province in Canada has an Insurance Act which governs activities of the insurers who are licensed to do business in their province.
All insurance contracts contain Statutory Conditions.  Until recently, all referred to a dispute process known as “Appraisal”.  Much of this article will refer to this mechanism as it has only been in recent years that several Provinces have ammended their Statutory Conditions to rename it as “Dispute Resolution”.  What has not changed has been the foundation that this mandatory section of the contract allows this process to determine:
1.    The value of the property insured.
2.    The value of the property saved.
3.    The amount of the loss.
Beyond this, the wordings within each Act defines the process to be followed.  And for the most part it follows the historical language that has been in place for decades.  Each Act should be reviewed for its own ideosynchracies.  Some differences include:
1.    In B.C. and Alberta they renamed the Statutory Condition to-- “Dispute Resolution”. Appraisers are now called “Dispute Resolution Representatives”.  Additionally, the representative cannot be the insured or insurer. 
2.    B.C. has also built in a mandatory requirement that where there is a disagreement as to the value of the loss they must give notice to the insured within 21 days of the dispute resolution process.
3.    Manitoba, Newfoundland, PEI and Nova Scotia have all made changes where they are demanding impartiality of the appraisers and umpire.  Their wording requires them to be “disinterested” parties.   Several of them also go on to say the umpire must not only be “disinterested” but “competent”. 
4.    Manitoba also has a curious inclusion at S. 123(3) of their Act, which seems to open the door for any party not happy with the appraisal process to seek a rehearing. Manitoba courts have not yet had to deal with this issue.
5.    Statutes in Saskatchewan, Alberta and Manitoba specifically exclude hail insurance contracts from this process.
One can see that the legislators in some of the Provinces are attempting to get fresh faces to have a new look at the matters in dispute.  It will be interesting to see if Ontario follows suit with any changes in the future. 
While these changes are important to take note it can be argued that the changes have not had a substantive impact on the overall process that has been in place for decades.

A proof of loss form must be filed before the process can be initiated.  This submission should comply with the provisions laid out in Statutory Condition #6 (Requirements of the Insured Following a Loss).
A letter (notice) by either the policyholder or the insurer is all that is required to start the ‘Appraisal’ process.  In this letter, the party making the demand would formally identify who will be acting as their appraiser in this process.  The other party then has 7 clear working days to appoint their chosen appraiser.
With both appraisers picked, they have 15 days to agree on their choice of an umpire.  This time period can be extended by consent of both appraisers as there may be additional time required for them to meet and identify the issues in dispute.  The meeting of the appraisers may also result in some negotiations which could result in the resolution of some or all of the issues.  There is no need for an umpire if the two appraisers reach an agreement. These initial meetings can be held on a “Without Prejudice” basis.
If the two appraisers cannot agree on an umpire they will go before a motion court judge to have someone selected. 
With an umpire in place, the process will start and that will be driven by the umpire’s “style” of conducting the session.  There are no formal rules of conduct. It is up to the umpire’s descretion.
Many umpires will begin the process by requesting that each appraiser submit a document brief that could include:
§  A narrative setting out the issues in dispute and the appraiser’s opinions.
§  Insurance policy details.  Underwriting file if applicable.
§  Repair estimates, drawings or opinions.
§  Analytical charts comparing pricing.
§  Proofs of loss/ payment list.
§  Photographs / videotape.
§  Engineering reports, if applicable.
§  Key correspondence, if applicable.
§  Any expert reports or opinions to support a point of view.
§  Relevant case law, articles, or other material that might support a point of view.
No one should underestimate the importance of this brief of documents.  You are providing the umpire with a first impression of your point of view.  The appraisers should make an effort to agree beforehand on the submission of common documents to avoid duplications that might lead to an increase in costs..
The submissions should be made in duplicate to the umpire.  To even the playing field, the umpire will ensure each side gets the other side’s brief upon receiving them.  In addition, any requests of the umpire should be made in writing, with a copy sent to the opposing appraiser.  No one should communicate one-on-one with the umpire; to eliminate surprises, both appraisers and the umpire should be dealing with the same information flow.  
Disputes over the amount of loss might require the umpire to consider requests that might not be seen in other ADR mechanisms, including: 
§  Completing a site inspection.
§  Attending a storage warehouse to inspect equipment, fixtures or other building contents.
§  Engaging additional experts to determine the extent of damage.
In advance of the Appraisal session, appraisers should consider whether or not they wish to bring witnesses to the session.  By consent of the umpire, others can be allowed into the session to provide information not evidence.  This has included:
§  A contractor to discuss his scope of damage or clarify pricing issues.
§  An engineer to elaborate on their report or to clarify a specific point.
§  The initial loss adjuster who might assist the insurer’s appraiser in presenting a myriad of documents.
§  A lawyer representing the policyholder who wished to be present to assist in the choice of appraiser.
§  The policyholder to provide information on the claim that has been submitted.  On these occasions the policyholder has been allowed to speak and the umpire addressed questions on specific points.  Allowing the insured his ‘day in court’ can be helpful to achieving a successful outcome for this process.
The umpire must strictly control who is allowed into the session and what input they have into the process.  The only people with official status in this process are the two appraisers and the umpire.  Each appraiser must feel comfortable that the process is being handled in a fair and even-handed fashion.
In assessing the role and actions of the umpire, consideration might be given to the often quoted wording in Regina V. Sussex Justice; Ex Parte McCarthy, 1924, 1 Kings Bench:
“It is of fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done.”
This concept is reinforced in Kane V. Board of Governors for UBC, Supreme Court of Canada, 1980 where our top court analyzed the fairness of a tribunal and set out some guiding principles.
At the start of a session the umpire will review how the session will be conducted.  These opening remarks set the ground rules for everyone including witnesses who may be in the room.
After opening remarks, many umpires take a mediation approach to resolving the issues.  Both sides are given appropriate, uninterrupted time to present their arguments.  The umpire will then control a debate between both appraisers.  For those familiar with mediation procedures, this is an interest-based approach.  As the discussion unwinds, most umpires will then gradually move to a “rights-based” approach in which the umpire will provide an opinion on an issue.  The umpire’s opinions may stimulate further discussion to see if some common ground can be developed with everyone or with one of the two appraisers.
The umpire must ensure the process stays within the limits of his or her authority and does not drift into areas that should properly be addressed in a court of law.  For example,  an appraiser for the insured might ask the umpire to agree with them that some goods were destroyed in a fire.  The appraiser for the insurer argues the goods were not in the premises destroyed.  An umpire can drive the process to reach a conclusion as to the value of the loss but cannot reach a conclusion as to whether the property was on the site or not when the fire happened.  Any conclusion on that type of thing has to be left to a court of law.
Usually, an Appraisal session is concluded in one meeting.  Sometimes, more than one meeting is required, and the umpire also can adjourn the session while an appraiser develops and submits further documentation.
Most Appraisals cover many separate issues in dispute.  The umpire might choose to try and settle the issues one-by-one.  As each item is debated, situations may occur where:
§  Both appraisers and the umpire reach unanimous agreement.
§  The appraiser for the insurer and umpire agree.
§  The appraiser for the insured and the umpire agree.
When two out of three parties agree on an issue it is deemed to be resolved.  The Award Document that is created can reflect individual items or, by consent, the parties can use the issues they have resolved to arrive at a macro settlement number whereby at least two of the three parties agree on the figures. There is some flexibility as to how the Award Document can be constructed. 

Umpires have different ways to conduct their sessions.  Some umpires listen to the separate points of view and then write out lengthy “Reasons” as to how they arrived at certain numbers.  If one of the appraisers agrees on the umpire’s analysis then the matter is concluded.  Other umpires treat the appraisal session as a mediation and keep the parties involved actively talking and negotiating until the matter reaches a final decision. 
The umpire and appraisers do not have to explain how they came up with final numbers to anyone.  They embark on a process that does not have rules to it. They follow this journey and arrive at a result when two of three parties agree.  Many sessions result in a one page document showing final numbers. That is all that is required.
Once the ‘Appraisal’ mechanism is triggered, the policyholder and insurer are required to pay 100% of their own appraisers costs.  In addition, each side is required to pay 50% of the umpire’s costs.
It is important that everyone understands early in the process the requirementts for contributing to costs.  Lawyers should also note that once the appraisal process is triggered if they elect to represent their client as the appraiser, their costs are paid 100% by their client regardless of the outcome.

The Appraisal process has achieved its goals in many situations.  Here are a few examples:
1.      Water came up through the basement windows of a residence.  The basement was flooded to a depth of 12 inches of water.  The insured felt that 100% of the basement contents should be replaced. The insurer’s experts felt that most of the damaged goods could be cleaned.  There was a huge difference between both of their positions.

2.      A tree crashed through the roof of a commercial building resulting in extensive water damage to office inventory and stock.  The insured’s builder felt the entire roof needed to be replaced.   The insurer felt the roof could be repaired. There was a difference of $400,000 in the structural repairs to the building.

3.      The insured had been evacuated from their home by public authorities.  They lived in a school gymnasium for a week. On returning home they found that water had entered their home through a hole in the roof and a broken window.  They felt this had happened 5 days ago and they found what they thought was “mould” in several parts of their home.  They felt the entire home was contaminated with mould and extensive renovations and content replacement was required.  The insurer’s experts felt the mould was pre-existing and not part of the damage claim.  Additionally, they felt that most of the content items could be cleaned.  They were $200,000 apart in their arguments with the insurer.

4.      A hailstorm hit a large area damaging many homes.  The insured had damage to the west side of his roof but not the east side.  They wanted the entire roof to be replaced. Their insurer felt they should only be repairing the damaged area.  There was a $10,000 gap between both positions.


The use of Appraisal or Dispute Resolution is gaining a broader use across Canada.  But, it is hard to imagine how this ADR process, that has been part of our Statutory Conditions for so long has not been utilized on a more regular basis earlier in the dispute.  You can observe by reviewing the many legal cases that this process has been triggered well along the journey of the claim. 
Of additional interest is that there are no specific rules on how an Umpire should conduct this process.  Individual umpires have developed their own style on how they get the job done but it always boils down to two of the three parties involved in this process reaching an agreement.  The vast majority of appraisals are concluded in a quick, efficient, cost-effective manner.  The actual results of the process are rarely appealed and even if they were, it is very unlikely a court is going to overturn the result.
There are many legal decisions in Canada that lend guidance to the selection of appraisers and the appointment of umpires.  These cases also provide assistance to determining the authority that the process has to reach a decision.  If anyone wishes more specific information they can contact me for more information.

Glenn Gibson 

E-  Glenngibsonglenn@gmail.com

This blog post has been written by Glenn Gibson, Vice-Chariman, Hamilton Tiger-Cats and Former EVP & Global Chief Strategy Officer, Crawford & Company (Canada) Inc.

Glenn Gibson is on CatIQ's Canadian Catastrophe Conference's 2016 Advisory Committee and will be moderating the Claims Executives panel during the conference.

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